Mortgages are complicated things that involve a lot of money. While the application process can be very convoluted in and of itself, it doesn’t mean that all that time applying means you know what all the numbers and figures mean. From the interest to the insurance, here are the most important components of your mortgage, and how each one effects what you are paying at the end of the day.
The principal of a mortgage is, simply put, the money you borrowed to pay for your home. So if you borrowed $250,000 to buy your property, your principal is $250,000. What you pay every month in your mortgage payment goes partly against that principal partly against the interest you are paying for the loan. So if your mortgage payment is $1000 a month and $600 of that total amount is towards the principal, that means $400 is in interest payments. Basically, it means that the $600 is going against your mortgage at its base amount, the amount of money you borrowed to buy the property.
The interest on your mortgage is how the the people who gave you the mortgage make money off of your loan. It is, in essence, a service fee applied to your mortgage that you pay with every single payment. The way this amount is calculated depends on a number of factors, but the driving one is the interest rate, or percentage point applied to the mortgage. This number is then factored into how much is left over of the principal on a regular basis. So if you have a 3% interest rate on that $250,000 mortgage, your lender will receive $7500 back off the loan. But this isn’t the total they will make. That number is much higher due to compounding.
Compounding interest works by reassessing the loan at regular increments and reapplying the interest rate. This happens semi-annually according to Canadian law and means the money you pay in interest is much higher by the end of your mortgage than that measly $7500.
Interest rates can be fixed or variable, meaning your rate will stay the same for the duration of your mortgage or change after a certain period of time. Variable mortgages are usually structured to give a very good deal at the outset, only to make more money on the back end with a slightly higher-than-average rate in the later parts of the mortgage.
If you own a property in Canada, you will most likely be paying property taxes to your local government. It is the most common way for municipalities to collect tax money from their citizens. Many mortgages factor your property taxes into their mortgages, effectively paying your taxes on your behalf. This is a useful thing since property taxes can be quite substantial if you try and pay them in one annual chunk as opposed to monthly instalments.
Depending on how much money you put down on your home and the kind of mortgage you end up having, insurance could be a mandatory part of your home buying process. Insurances come in many varieties, from home owner’s insurance that helps you get some money in the event of a fire or other disaster, replacement insurance which is more comprehensive, and lender’s insurance, which protects your lender in the event of foreclosure, bankruptcy and other financial disasters.
Mortgages are complex things, but these are the four things that you will be paying every time you make a payment.